Brace for slump in Kenya growth

Commercial banks are in for a rough year as the high interest regime and possible defaults on loans paints a gloomy picture for the industry, a new research has warned.

A banking industry research by Renaissance Capital released on Tuesday projects that the sharp increase in lending rates will slow down credit growth by more than half in 2012 in effect handing banks their toughest year in three years.

The investment bank says it is inevitable loan uptake is expected to grow by 10 per cent this year, down from the expected annual growth of 50 per cent last year.

“Last year was not a difficult one for the banks, but we believe the reality of tighter monetary policy and rising Non Performing Loans (NPLs) will change that picture in 2012,” the research reads in part.

Looming job cuts

According to the report, the other challenges banks will face include increase in NPLs and a rise in cost of funding.

The greatest risk will come through term financing, according to Renaissance, with some banks paying in excess of 30 per cent for fixed-term deposits.

Renaissance expects customers’ ability to meet their monthly repayments to be adversely affected, with SMEs, small corporates, the retail and real-estate businesses the most vulnerable ones of the loan book.

This outlook now means that commercial banks are unlikely to see the double digits growths reported last year in what promises more job cuts in the industry and a slowdown in new hiring.

The investment bank however reckons that the interest rates have now peaked and would start declining as early as May following the decision by the Monetary Policy Committee (MPC) meeting of January 11 that decided not to raise rates.

“We expect rates to start declining in second half of 2012, but acknowledge it could happen as early as May. Clearly, this would be positive for both retail and corporate clients,” Ms Yvonne Mhango, Renaissance Capital’s Sub-Saharan Africa Economist said.

Already the impact of the high interest regime has started showing in the economy.

Official data from the Central Bank of Kenya shows bank loans and advances to the private sector declined by Sh12 billion to Sh1.2 billion between October and November last year.

The research gave shares of KCB and Equity Bank a buy in ratings and a hold rating on Co-operative Bank of Kenya arguing that a high proportion of the expected headwinds in the industry are already discounted in current share prices.